Liam Law vs. Olympic Sawmill Co.

An additional sum stipulated in a loan document to answer for attorney's fees, legal interest, and incidentals is presumed lawful as liquidated damages under Article 1354 of the Civil Code unless the debtor proves the contrary, and where usury has been legally non-existent by virtue of Central Bank Circular No. 905, the procedural rules requiring specific denial under oath of usury allegations are deemed repealed with retroactive effect.

Plaintiff Liam Law extended an interest-free loan of ₱10,000 to defendant Olympic Sawmill Co., a partnership, and Elino Lee Chi, its managing partner. The loan matured on January 31, 1960, but remained unpaid, prompting the debtors to request an extension. The dispute centers on a subsequent loan document executed on March 17, 1960, by which the parties extended the payment deadline to April 30, 1960, while increasing the obligation by ₱6,000 purportedly to cover attorney's fees, legal interest, and other incidentals — an addition the defendants later characterized as usurious interest.

On or about September 7, 1957, plaintiff Liam Law loaned ₱10,000 without interest to defendant partnership Olympic Sawmill Co. and to defendant Elino Lee Chi as managing partner. The loan ultimately became due on January 31, 1960, but was not paid on that date. The debtors instead requested an extension of three months, or up to April 30, 1960.

On March 17, 1960, the parties executed another loan document. Payment of the ₱10,000 was extended to April 30, 1960, but the obligation was increased by ₱6,000, with the document providing that the sum of ₱6,000 "shall form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement." Defendants again failed to pay their obligation by April 30, 1960.

On September 23, 1960, plaintiff instituted a collection case. Defendants admitted the ₱10,000 principal obligation but claimed that the additional ₱6,000 constituted usurious interest. Upon plaintiff's application, the trial court issued a writ of attachment on the same date over real and personal properties of defendants located at Karanglan, Nueva Ecija. After the writ was implemented, proceedings before the trial court centered principally on the attachment.

On January 18, 1961, the trial court issued an order allowing both parties to simultaneously submit motions for summary judgment. Plaintiff filed his motion on January 31, 1961, and defendants filed theirs on February 2, 1961. On June 26, 1961, the trial court rendered judgment ordering defendants to pay plaintiff ₱10,000 plus ₱6,000 by way of liquidated damages, with legal rate of interest on both amounts from April 30, 1960. No evidentiary hearing was held on the question of whether the ₱6,000 obligation was illegal or usurious.

• Usurious Interest: Defendants-appellants insisted that the additional ₱6,000 constituted usurious interest and that the claim of usury should have been deemed admitted by plaintiff because it was "not denied specifically and under oath" in the pleadings, invoking Section 1, Rule 9 of the Rules of Court.
• Admission of Principal: Defendants admitted the ₱10,000 principal obligation but contested the validity of the ₱6,000 addition as an unlawful exaction.

• Validity of the ₱6,000 Addition: Whether the additional ₱6,000 stipulated in the March 17, 1960 loan document constituted usurious interest or lawful liquidated damages.
• Procedural Rule on Usury Allegations: Whether plaintiff's failure to deny specifically and under oath the allegation of usury in the answer should have resulted in a deemed admission of usury, pursuant to Section 9 of the Usury Law (Act 2655) and Section 1, Rule 9 of the Rules of Court.

• Validity of the ₱6,000 Addition: Affirmed. The ₱6,000 was treated as liquidated damages, not usurious interest, being presumed lawful under Article 1354 of the Civil Code, with defendants having failed to prove the contrary in the absence of any evidentiary hearing.
• Procedural Rule on Usury Allegations: No. Section 9 of the Usury Law applies only to a complaint filed against an entity that committed usury for recovery of usurious interest paid, not to a case where the defendant alleges usury. Moreover, usury had become legally non-existent under Central Bank Circular No. 905, rendering the procedural rules on usury allegations repealed with retroactive effect.

• Validity of the ₱6,000 Addition: Under Article 1354 of the Civil Code, regarding the agreement of the parties relative to the ₱6,000 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary." Because no evidentiary hearing was held, defendants had not proven that the ₱6,000 obligation was illegal. The Court confirmed the trial court's finding that the ₱6,000 represented liquidated damages suffered by plaintiff as of March 17, 1960, representing loss of interest income, attorney's fees, and incidentals. The presumption of lawfulness thus stood unrebutted.
• Procedural Rule on Usury Allegations: Section 9 of the Usury Law (Act 2655) envisages a complaint filed against an entity that has committed usury, for the recovery of usurious interest paid. In that scenario, if the entity sued does not file an answer under oath denying the allegation of usury, the defendant is deemed to have admitted the usury. The provision does not apply where, as in the present case, it is the defendant — not the plaintiff — who is alleging usury. Furthermore, usury had become legally non-existent: interest could be charged as lender and borrower may agree upon, pursuant to Central Bank Circular No. 905, Series of 1982. The Rules of Court provisions regarding allegations of usury, being procedural in nature, were accordingly considered repealed with retroactive effect, since procedural laws are retrospective in their application to actions pending and undetermined at the time of their passage.

• Presumption of Lawfulness of Obligations (Article 1354, Civil Code) — An obligation agreed upon by the parties is presumed to exist and to be lawful unless the debtor proves the contrary. The Court applied this presumption to the ₱6,000 addition in the loan document, holding that because defendants failed to present evidence at any hearing rebutting its lawfulness, the ₱6,000 stood as valid liquidated damages.
• Legal Non-existence of Usury (Central Bank Circular No. 905) — By virtue of Central Bank Circular No. 905, Series of 1982, the rate of interest on loans or forbearance of money, goods, or credits shall not be subject to any ceiling prescribed under the Usury Law. Interest may be charged as lender and borrower may agree upon. The Court relied on this circular to hold that usury was legally non-existent, rendering procedural rules on usury allegations obsolete.
• Retroactive Application of Procedural Laws — Statutes regulating the procedure of the courts are construed as applicable to actions pending and undetermined at the time of their passage; procedural laws are retrospective in that sense and to that extent. The Court applied this principle to hold that the Rules of Court provisions on usury allegations, being procedural in nature, were deemed repealed with retroactive effect in light of the legal abolition of usury.

• "The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury." — This passage clarifies the limited scope of Section 9 of the Usury Law, distinguishing between a plaintiff's suit to recover usurious interest and a defendant's defense of usury, a distinction central to the Court's rejection of the defendants' procedural argument.
• "Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged as lender and borrower may agree upon." — This statement encapsulates the Court's recognition of the legal abolition of usury under Central Bank Circular No. 905, a principle that effectively mooted the defendants' usury defense.
• "Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural laws are retrospective in that sense and to that extent." — This formulation of the retroactivity doctrine for procedural laws was relied upon to justify the repeal of usury-related procedural rules with retroactive effect.

• People vs. Sumilang, 77 Phil. 764 (1946) — Cited as authority for the proposition that procedural laws are retrospective in application to actions pending and undetermined at the time of their passage. The Court applied this principle to hold that the Rules of Court provisions on usury allegations were repealed with retroactive effect.
• De Lopez, et al. vs. Vda. de Fajardo, et al., 101 Phil. 1104 (1957) — Cited in support of the retroactive application of Section 24(d), Republic Act No. 876 (the Arbitration Law), as a procedural provision, reinforcing the principle that procedural laws operate retroactively.

• Article 1354, Civil Code of the Philippines — Provides that obligations agreed upon by the parties are presumed to exist and be lawful unless the debtor proves the contrary. The Court applied this presumption to uphold the validity of the ₱6,000 addition as liquidated damages, defendants having failed to present evidence rebutting its lawfulness.
• Section 9, Usury Law (Act 2655) — Required a person or corporation sued for usury to file an answer under oath, with failure to do so constituting admission of the facts in the complaint. The Court held this provision inapplicable because it governs complaints to recover usurious interest, not cases where the defendant raises usury as a defense.
• Section 1, Rule 9, Rules of Court — Governed the effect of failure to deny allegations specifically and under oath. Defendants invoked this rule to argue that plaintiff's failure to deny the usury allegation under oath constituted admission; the Court rejected this argument in light of the legal abolition of usury.
• Central Bank Circular No. 905, Series of 1982 — Lifted the ceiling on interest rates, providing that the rate of interest on loans or forbearance of money, goods, or credits shall not be subject to any ceiling prescribed under the Usury Law. The Court relied on this circular to declare usury legally non-existent and to justify the retroactive repeal of procedural rules on usury allegations.
• Section 24(d), Republic Act No. 876 (Arbitration Law) — A procedural provision cited by the Court as an example of retroactive application of procedural laws, reinforcing the principle applied to the usury-related rules.

Teehankee (Chairman), Plana, Relova, Gutierrez, Jr., and De la Fuente, JJ., concurred.